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Investment Canada Act upheld by court

The Federal Court has upheld the act governing foreign investment in Canada, potentially opening the door to a forced sale of U.S. Steel Corp.’s Canadian operations.

By Kristine OwramThe Canadian Press

Mon., June 14, 2010

The Federal Court has upheld the act governing foreign investment in Canada, potentially opening the door to a forced sale of U.S. Steel Corp.’s Canadian operations.

U.S. Steel had challenged the constitutionality of the Investment Canada Act, arguing it doesn’t give foreign companies the rights required under Canadian law.

But the court ruled Monday that the act does not violate the Canadian Charter of Rights and Freedoms or the Bill or Rights.

This means a court case against U.S. Steel will go ahead. It will now be up to the court to rule on whether or not the company was justified in breaking employment and production promises it made when it acquired the former Stelco Inc. in 2007.

If U.S. Steel is found to have illegally broken its undertakings, it could face a multimillion-dollar fine or be forced to sell its Canadian operations, which include plants in Hamilton and Nanticoke, Ont..

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The company doesn’t dispute that it broke two of the 31 promises it made at the time of its acquisition of Hamilton-based Stelco for more than $1 billion. However, it says it was justified in doing so because the “sudden international economic crisis” left it with no choice.

Federal Industry Minister Tony Clement said last year that this was not a good enough justification and therefore legal action was necessary.

As of May 2009, U.S. Steel’s Canadian operations had shrunk to only 23 per cent of the more than 3,000 workers it promised to employ when it took over Stelco, according to the federal government.

Since then, 800 workers have been recalled to the company’s Hamilton plant, while 900 workers in Nanticoke resolved a lockout in April.

U.S. Steel had argued that the Investment Canada Act as it exists violates its rights because it allows for the kind of punishment found in a criminal case — in this case, a fine of $10,000 a day for as long as the investor fails to meet its promises, or divestiture of its Canadian property. The fine could amount to $14.6 million in U.S. Steel’s case, the company’s lawyers said.

Meanwhile, it fails to give the protections that would be guaranteed to a defendant in a criminal proceeding, including full disclosure of the case against it. For example, the industry minister was not obligated to give his reasons why U.S. Steel had failed to justify its inability to meet its promises.

But the government’s lawyers argued that proceedings under the Investment Canada Act have none of the hallmarks of a criminal case, and any fine had to be big enough so companies don’t simply treat it as “just another cost of doing business.”

The Federal Court will now hear arguments from both sides as to whether U.S. Steel was justified in failing to meet its promises and, if not, how it should be punished.

The United Steelworkers union and Lakeside Steel Inc. have both been named interveners in the case. Lakeside Steel, based in Welland, Ont., has expressed interest in buying U.S. Steel’s Canadian assets if it is forced to sell them, while the union wants compensation for all affected workers.

Under the Investment Canada Act, a federal review is required any time a Canadian company with assets of more than $312 million is purchased by a foreign entity.

The Investment Canada Act came into force in the mid-1980s when the Conservative government of Brian Mulroney scrapped the previous law, called the Foreign Investment Review Act, which had been passed by the Trudeau government in the early 1970s.

The Tories viewed the former law as too restrictive and eased the conditions on potential foreign takeovers, changing the test of “significant benefit” to one of “net benefit” as a condition for approval.

Ottawa blocked an attempt by MDA to try to sell its space division to American firm Alliant Techsystems Inc. in 2008, the first time the federal government rejected a foreign takeover outright under the act.

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